Cypen & Cypen
NOVEMBER 21, 2007
Stephen H. Cypen, Esq., Editor
Section 845 of the Pension Protection Act of 2006, signed into law August 16, 2006, provides for a tax-free distribution from a pension plan of up to $3,000 per year to help pay premiums on health insurance or long-term care insurance for a retired public safety officer, his spouse and dependents. The employee must have separated from service due to a disability or after attaining normal retirement age. There had been some confusion on how to make sure these payments are “excluded” from taxable income. (There had been some notion that such amounts should be reflected as a reduction in taxable income on Form 1099R (Box 2a).) Well, that idea is problematic in that the retirement plan not the entity making the decision that the medical premium payment should be excluded from the individual’s taxable income. The election must be made by the individual. Besides, the retirement plan may not have sufficient information to determine whether the payments can be excluded by the individual (for example, the individual may be receiving retirement income from more than one plan). The instructions to Form 1040 for 2007 contain the solution. If you are an eligible retired public safety officer, you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. The premiums can be for coverage for you, your spouse or dependents. The distribution must be made directly from the plan to the insurance provider. You can exclude from income the lesser of the amount of the insurance premiums or $3,000. You can only make this election for amounts that would otherwise be included in your income. If you make this election, reduce the otherwise taxable income from your pension or annuity by the amount excluded. (The amount shown in Box 2a of Form 1099-R does not reflect the exclusion.) Report your total distributions on Line 16a and a taxable amount on Line 16b of Form 1040. Enter “PSO” next to Line 16b. Better yet, let your accountant handle everything.
2. STATE AND LOCAL PENSIONS ARE DIFFERENT FROM PRIVATE PLANS:
The Center for Retirement Research at Boston College is undertaking a multi-year in-depth study of state and local pension plans; the study is funded by the Center for State and Local Government Excellence. As a prelude to subsequent reports on various aspects of state and local plans, a new brief identifies the key differences between employer-sponsored plans in the private and public sectors. The pension landscape in the public sector differs sharply from that in the private sector. State and local plans are primarily defined benefit, coverage is virtually universal and only 70% of workers are in Social Security. By contrast, private plans are mostly 401(k)s, less than half of the workforce is covered and everyone participates in Social Security. Public defined benefit plans tend to provide larger benefits than their private sector counterparts, and most offer post-retirement cost-of-living adjustments, which are virtually unheard of in the private sector. Public plans tend to rely more heavily on employee-contributions, invest slightly more aggressively and be about as well funded as their private sector counterparts. The perfect storm of low interest rates, which swelled liabilities, and the stock market slump, which reduced asset values, reduced funding levels in both the public and private sectors. Although funding has rebounded in the last five years, states have renewed their interest in moving from defined benefit to defined contribution plans. States and localities are also facing the challenge of how to respond to new rules from the Government Accounting Standards Board, which require the disclosure of costs of promised post-retirement health care benefits, which far exceed those associated with pension underfunding. Future briefs will examine a host of issues in more detail. These will include possible reasons for the different mix of pension type in the public and private sectors, an analysis of the shift to defined contribution plans in some states, a closer look at the funding assumptions and status among state and local plans and the move toward higher-risk, higher-return asset classes, such as real estate, private equity and hedge funds. The goal of these studies is to highlight -- for policymakers, public employees and taxpayers -- this important component of the nation’s retirement income system.
3. PENSIONS AND RETIREMENT PLAN ENACTMENTS IN 2007 STATE LEGISLATURES:
National Conference of State Legislatures has published its report on enactments in state legislatures for 2007. The report summarizes selected pensions and retirement legislation that state legislatures enacted this year, from 2006 legislation not previously reported and a few items of particular interest that failed to pass or were vetoed. Bills summarized have been enacted into law, unless there is a specific indication to the contrary. Not all legislation had been codified at the time the report was completed. Some legislatures remain in session at time of publication. The goal of the report is to help researchers and policymakers know how other states have addressed issues that could arise in any state. Cleanup-legislation, cost-of-living adjustments, administrative procedures and technical amendments have been excluded. The report is organized into topics that legislatures addressed in 2007. The following are a few of the subject areas:
The useful 21-page report is available online at http://www.ncsl.org/programs/fiscal/pensun07.htm.
4. CALIFORNIA WILL PAY CalSTRS INTEREST ON WITHHELD $500 MILLION PAYMENT:
A release from California State Teachers’ Retirement System states that the California Supreme Court has declined to review a lower court decision awarding California State Teachers’ Retirement System’s $200 Million interest payments on the $500 Million withheld by the state in 2003-2004 (see C&C Newsletter for July 12, 2007, Item 5). The funds will support CalSTRS’ inflation-protection program, also known as Supplemental Benefit Maintenance Account. The state paid CalSTRS the $500 Million in September, 2007, but appealed the Third District Court of Appeal’s decision on the interest payment. The California Supreme Court let stand the lower court ruling on November 14, 2007. A legislative appropriation will be required to pay the interest.
5. SEC ISSUES CONCEPT RELEASE ON MECHANISMS TO ACCESS DISCLOSURES RELATING TO TERRORISM:
The Securities and Exchange Commission is soliciting comment about whether to develop mechanisms to facilitate greater access to companies’ disclosures concerning their business activities in or with countries designated as State Sponsors of Terrorism. Comments are due on or before sixty days after publication in the Federal Register. By way of background, the U.S. Department of State publishes a list of countries that the Secretary of State has designated as State Sponsors of Terrorism. The five countries the U.S. Secretary of State currently designates as State Sponsors of Terrorism are Cuba, Iran, North Korea, Sudan and Syria. Over the last several years, a large number of state governments, universities, pension funds and other institutional investors, as well as individual investors, have sought information relating to public company business activities in or with State Sponsors of Terrorism in furtherance of their desire to ensure that their invested funds do not directly or indirectly support terrorism. The Commission’s Office of Global Security Risk routinely monitors public company disclosure of material business activities in or with State Sponsors of Terrorism. On June 25, 2007, the Commission added a feature to its website that provided direct access to public companies’ 2006 annual report disclosures concerning past, current or anticipated business activities in or with one or more of these countries. The sole purpose of the web site feature was to provide direct access to company disclosures on the topic. The web feature was constructed as a tool to assist investors seeking to view companies’ disclosures regarding business activities in or with any of the five State Department-designated State Sponsors of Terrorism. It was not based on a simple keyword search of the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The web tool was the result of a staff review of company disclosure including any reference to a State Sponsor of Terrorism. This disclosure review allowed the web tool to exclude disclosure unrelated to a company’s activities in or with any of these countries. Because of the importance the SEC places on complete, accurate and timely disclosure, comments about the web tool’s inability to access more current information about company’s business activities in or with a State Sponsor of Terrorism since the date of the company’s most recent annual report were of particular concern to the agency. And because more recent disclosure might include, for example, the fact that a company had completely terminated its activities in a country, the more recent information would be material to a complete understanding of the disclosure in the last annual report. SEC also questions whether a company’s disclosure of legitimate or immaterial business activity should lead to its being identified through a web tool that highlights connections with State Sponsors of Terrorism. To address these and related concerns, on July 20, 2007, the web tool was indefinitely suspended. The suspension announcement indicated that Commission staff would consider whether to recommend a Concept Release on the question of how best to make public company disclosure of business activities in or with a State Sponsor of Terrorism more accessible. The Concept Release is being issued as a result of that process, in order to solicit public comment on these important issues in a more formal way. Engaging the public’s input on these issues is particularly appropriate to the extent that SEC contemplates novel approaches to investor access to company disclosures. The Commission hopes that the process will afford the best opportunity to address all legitimate concerns.
6. DEPARTMENT OF LABOR PROPOSES EXPANSION OF CLASS EXEMPTION ON SETTLEMENT OF LITIGATION:
The U.S. Department of Labor’s Employee Benefits Security Administration announced a proposed amendment to an existing class exemption, commonly known as the Settlement Class Exemption, from the prohibited transaction restrictions of the Employee Retirement Income Security Act and the Internal Revenue Code. The proposal would expand the categories of assets that can be accepted under the exemption to settle litigation with related parties, if the transaction is otherwise beneficial to the employee benefit plan. Prohibited Transaction Exemption (PTE) 2003-39 generally exempts a plan’s receipt of consideration from a related party in partial or complete settlement of actual or threatened litigation, as well as extensions of credit from a plan that covers settlement payments made in installments by the related party. Currently, the consideration paid by the related party must generally be in the form of cash. The proposed amendment would expand the categories of assets that may be accepted by plans in settlement of litigation, subject to certain conditions. The amendment would permit receipt of non-cash consideration in settlement of a claim (including the promise of future employer contributions), but only in instances where the consideration can be objectively valued. The proposal would also amend PTE 2003-39 to permit plans to acquire, hold or sell non-qualifying employer securities, such as warrants and stock rights, where such securities are received in settlement of litigation, including bankruptcy proceedings. In addition, the proposal would clarify the independent fiduciary’s responsibility for assessing reasonableness of the entire settlement, including any attorney’s fee award or other sums paid from the settlement proceeds.
7. PRE-MEETING WRITTEN REQUEST TO REMOVE ITEM FROM CONSENT AGENDA DOES NOT VIOLATE FLORIDA SUNSHINE LAW:
A Florida county has adopted Rules of Procedure for Meetings. One rule acknowledges that the commission has a consent agenda for routine matters that are typically non-controversial and do not deviate from past board direction of policy. These items are presented on the portion of the agenda designated for consent items, and may be voted on with one motion. However, if a commissioner desires to withdraw an item from the consent agenda for individual voting, he must make a written request to the chairman of the commission at least 24 hours before the meeting. Thus, the provision requires that a written record be presented to the chair of the commission, indicating that an individual member of the commission wishes to take up an agenda item more thoroughly at a public meeting. This provision does not call for any discussion among members of the commission; rather, it provides a written record of an administrative request that a matter be discussed at a regularly-scheduled public meeting. The Florida Attorney General was asked if the provision was valid in light of Florida’s Government in the Sunshine Law, Section 286.011, Florida Statutes. The Government in the Sunshine Law requires that all meetings of a public board or commission must be open to the public. Florida courts have held that it is the entire decision-making process that is covered, not merely those meetings where the final vote is taken. Every step in the decision-making process, including the decision itself, is a necessary preliminary to formal action. It follows that each such step constitutes an official act, an indispensable prerequisite to formal action, within the meaning of the law. The Attorney General found no violation of the Government in the Sunshine Law by requiring a written request to be made of the chair of the commission in order to remove items of discussion from the consent agenda. However, he did caution members of the county commission to be mindful of the law and careful not to discuss substantive issues that may come before them in their consideration of whether to withdraw a subject from the consent agenda. Informal Attorney General Advisory Legal Opinion dated November 14, 2007.
8. FORMER HUSBAND REQUIRED TO INDEMNIFY FORMER WIFE AFTER WAIVING PORTION OF HIS MILITARY RETIREMENT PAY IN ORDER TO RECEIVE VETERANS’ DISABILITY BENEFITS:
The former wife sought review of a trial court’s denial of her motion to enforce a consent final judgment of dissolution of marriage by ordering the former husband to indemnify her after he waived a portion of his military retirement pay in order to receive veterans’ disability benefits. Because the former husband unilaterally reduced the amount of retirement pay awarded to the former wife in the judgment, she was entitled to an equivalent benefit as part of an action to enforce the judgment. The parties agreed that the wife would receive, as alimony, 42.5% of the former husband’s military pay upon his retirement. However, when the former husband retired, he waived a portion of his military pay in order to receive veterans’ disability benefits, effectively reducing the amount of retirement pay received by the former wife. The United States Supreme Court has held that while states have authority under federal law to divide disposable retired or retainer pay, they do not have the power to treat as divisible property military retirement pay that has been waived to receive veterans’ disability benefits. A settlement agreement to divide veterans’ disability benefits is unenforceable as being preempted by federal law. However, the rule does not prevent enforcement of an indemnification provision that provides for alternative payments from non-disability sources to compensate for reduction in military retirement benefits divided as part of a property settlement agreement. Furthermore, even in absence of an express indemnification provision, the trial court may order an equivalent benefit as part of an action to enforce a property settlement agreement if one spouse commits a voluntary act that defeats the intent of the parties. Thus, the Florida District Court of Appeal reversed, and remanded with directions that the former husband be required to indemnify the former wife if it finds he can do so from a source other than his veterans’ disability benefits. Blann v. Blann, 32 Fla. L. Weekly D2785 (Fla. 1st DCA, November 20, 2007).
9. IRS HAS $110 MILLION IN REFUND CHECKS LOOKING FOR A HOME:
Internal Revenue Service is looking for 115,478 taxpayers who are due refund checks worth about $110 Million, after the checks were returned as undeliverable. The refund checks, averaging $953, can be claimed as soon as taxpayers update their addresses with IRS. Some taxpayers have more than one check waiting. The “Where’s My Refund?” tool at IRS.gov enables taxpayers to check the status of their refunds. A taxpayer must submit his Social Security number, filing status and amount of refund shown on his 2006 return. The tool will provide status of the refund, and in some cases, provide instructions on how to resolve delivery problems. A refund check is normally returned as undeliverable when a taxpayer moves without updating his address with either the U.S. Postal Service or IRS. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 800.829.1954. Happy hunting.
10. LOCAL GOVERNMENTS BAIL OUT OF FLORIDA STATE FUND:
Concerned about the safety of their money (see C&C Newsletter for November 15, 2007, Item 1), local governments are pulling their cash out of the State of Florida-run investment pool. Pinellas County joined the exodus, yanking out its entire investment of $290 Million, according to Tampabay.com. In recent weeks, some $6 Billion has left the pool, nearly a fourth of its assets. The state pool, similar to a money market fund, is another casualty of the meltdown in the housing and mortgage markets. Even though it holds no subprime mortgages, the state pool does own securities backed by other types of mortgages. Prices of those securities have dropped as investors shy away from investments related in any way to mortgages. (The downgrading of 4% of the portfolio to junk did not help, either.) So far, none of the 995 local government participants have lost any money. However, the increased risk is making them nervous. And a sharp uptick in withdrawals from the pool is not unlike a brief run on a bank by anxious depositors. But, the flight to quality comes at a cost: super-safe investment alternatives will produce less interest to fund local government operations.
Smile: A curve that can set a lot of things straight.
12. QUOTE OF THE WEEK:
“Life is uncertain. Eat dessert
first.” Ernestine Ulmer
BEST WISHES FROM OUR FAMILY TO YOURS
FOR A VERY
Copyright, 1996-2007, all rights reserved.
Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.